Budget leaves the poor poorer as new tax year dawns

07 April 2008 / by Rachael Stiles

The Tax reforms which came into effect yesterday have been heavily criticised for penalising those who are already worst off and acting as a disincentive to work.

Opposing parties have accused the Prime Minister Gordon Brown and the Chancellor Alistair Darling of underestimating the prolonged and deeply felt affects of the credit crisis on households and the economy at large.

Even the Treasury has admitted that the changes – which encompass income tax, national insurance, capital gains tax and individual savings accounts (ISAs) – will leave one in five households worse off than they were before.

This fifth of the population are those who bring in modest incomes of £5,931 to £15,075; they will be worst hit because the Budget has done away with the 10p starting rate for income tax and they will now be subject to the basic rate of 20 per cent, down from 22 per cent.

Pensioners have lost out from this, but will be compensated with a 20 per cent increase in their personal allowance.

Those who earn between £34,840 and £40,040 will fare badly, as they will see their National Insurance contributions rise from one per cent to 11 per cent on this portion of their income. People earning below this bracket but above £15,075 will be better off, because they will gain more than they lose.

Changes to Capital Gains Tax have also created winners and losers, with the top rate of 40 per cent being replaced with a flat rate for everyone of 18 per cent; those who have previously been paying higher rates will rejoice as the rate they pay reduces, in some instances it halves, but small-fry entrepreneurs with shares in their own company will lose out as they were previously paying about 10 per cent and will now pay 80 per cent more.

Basic rate tax-payers will be at a great disadvantage as a result of the changes, as the CGT on their business assets could have been as low as five per cent in the previous tax year.

Non-domicile individuals living in the UK will also face a levy – those living here for more than seven years will have to pay £30,000 a year to preserve their non-dom status or else pay tax on their worldwide income and capital gains, not just that which they earn in the UK.

Investment houses who are trying to encourage people to save are voicing disappointment over the meagre changes to the ISA rules – the first time they have been revised since their inception in 1999 – which allow people to pay just £200 more a year into their tax-free savings account.

The changes have added to the already fierce criticism of Alistair Darling's handling of the credit crisis and his complacency over the full-impact of it on the UK and global economy; the Commons Treasury Committee warned him that Britain could be far more vulnerable that he has yet to admit.

The Business Secretary John Hutton has ruled out going back on the controversial tax reforms, despite protests from all political camps that they will target the low-paid workforce, and says that it should be seen within the wider perspective of the tax reform package.